Okay. They help keep bubbles from getting out of control. And when they cover, they provide liquidity, and also prompt rallies in the short, and sometimes longer, term.
Remember the famous ban on selling the stock of financial firms short back during the crisis of 2008? Chris Cox, then SEC Chairman, apologized for it just before he left office:
...However, Cox said he had some regrets over a drastic action the agency took as markets were hurtling downward in September. For a few weeks, the SEC stopped investors from making bearish bets on financial stocks like Morgan Stanley and Citigroup.
The SEC’s office of economic analysis is still evaluating data from the temporary ban on short-selling. Preliminary findings point to several unintended market consequences and side effects caused by the ban, he said.
“While the actual effects of this temporary action will not be fully understood for many more months, if not years, knowing what we know now, I believe on balance the commission would not do it again,” Cox told Reuters in a telephone interview from the SEC’s Los Angeles office late on Tuesday. “The costs appear to outweigh the benefits.”
Less liquidity in the markets was one of the unintended consequences, experts have said.
If you recall the summer and fall of 2008, you'll recall that even the heads of firms like Goldman were screaming about Shorty like penny stock CEOs. And they were wrong to do so. The shorts had in fact pointed out early on that the financial firms were overextended and in all kinds of trouble.
In other words, they were right. Why should they have been punished for being right?
News 
Market Data 
Discover 
